Europe's mobile operators flex their muscles

Phones4U's announcement that it will be only independent retailer to sell Vodafone contracts has had an immediate impact on the whole mobile phone retail business.

Shares in Carphone Warehouse slumped on the news, and even pointing out that Vodafone contracts only accounted for 10 per cent of its business didn't make much difference.

Hopes that that this was a maverick move, rather than a trend, were dashed by the other operators' reactions to the announcement. Orange admitted a good relationship with independents, but that it was reviewing its retail strategy, while O2 went further with Peter Erskine pointing out that Vodafone's decision to drop Carphone gave O2 the chance to cut its commissions.

Only T-Mobile could be convinced to pledge unmitigated support. "We are happy with the terms of business we have negotiated with Carphone and look forward to building on the strong relationship we enjoy with them," T-Mobile UK managing director Jim Hyde said.

Details of the deal between Vodafone and Phones 4U emerged last weekend, with the Sunday Times reporting that the retailer had agreed to sell 30,000 units a month, with incentives and penalties for over and under performance.

Carphone Warehouse chief executive Andrew Harrison said even if it had been offered such an agreement it would have turned it down as "it goes against everything we stand for".

Shareholders might object to this principled stand, and it sounds like bluster to us, but there is a more seismic shift here than one contract awarded to one retailer.

In the UK and Europe retailers have largely held sway over which handsets, and networks, they have sold. Network operators have been forced to offer huge subsidies on the latest and greatest handsets to ensure the retailers gave prominence to their products.

When the retailers discovered they could make money selling Bluetooth headsets, they went to the networks and demanded phones with Bluetooth support, the networks went to the manufacturers and demanded Bluetooth, and so it came to be. The customers were the last on the list and it was the retailers who set the schedule.

We have pointed out before that the system of heavily-subsidised handsets is not sustainable, but as long as retailers are able to play the operators off against each other then there is little that can be done about it.

A plan for the operators to all cut subsidies at the same time went badly in the Netherlands, with multi-million Euro fines all round, so only by getting more closely involved with the retailers, and signing exclusive deals, can the operators exercise any control over the subsidy, with a view to wiping it out.

Eventually, we will return to multiple retail channels selling handsets and contracts, without such high levels of subsidy, but before then we will have to go through a period of pain during which operators will severely limit and control their retail channels.

The task for Carphone Warehouse, and any other independent retailer, is to survive the next five years without getting so close to one network operator that you are no longer distinguishable from them. ®